IT companies at its innovative best to overcome rupee risk
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IT companies at its innovative best to overcome rupee risk

By SiliconIndia   |   Thursday, 24 January 2008, 08:00 Hrs
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Bangalore: The rupee appreciation has driven IT services companies to look at multiple options to minimize its shock. In the last 15 months, the rupee has appreciated in the region by 14 percent to 15 percent and every one percent rise has a margin impact of 40 to 50 basis points for IT firms.

Fresh clauses in contracts, price re-negotiations and extended forex covers seem to be some options before the companies to beat the rupee appreciation and volatility risk.

The most favorable option for the Indian companies has been re-pricing and many have managed such raises during contract renewals. Both Wipro and Infosys have managed price increases in the range of three percent to five percent from both existing and new customers.

According to Avinash Vashistha, CEO, Tholons, an offshore advisory firm, "exchange rate fluctuation, demonstration of higher productivity and the competitive scenario for buyers of IT services have been three key drivers for the IT services vendors getting a price increase."

However, analysts add that, in the long run, wild currency fluctuation is not something that Indian companies can easily pass on to their clients completely. While they may hope that client companies would meet them mid way in raising billing rates, IT industry trackers say that companies will have to learn to deal with such volatility on their own.

Companies have different strategies for the risk mitigation. For instance, Wipro, in the case of a four-year contract, will cover the currency at current rupee level (Rs 39) for the entire tenure so that the margins are protected.

Shifting its focus to non-dollar denominated contracts, Wipro is considering the possibility of dealing with local currencies such as euro with respect to European countries. It is despite the fact that U.S business still accounts for 62 percent of its business. "We are talking to customers to move into local currency in which they are. And, we are making decent success with new customers," says Suresh Senapaty, Wipro CFO.

At the same time, Satyam BPO has attempted some re-pricing with its customers and also new outcome-linked contract structures, looking at some guaranteed revenue structures.

Commenting on the issue, Infosys CFO V Balakrishnan says new structures based on risk based pricing and productivity linked contracts will emerge.

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